Power plays and price war

This opinion piece first appeared in the Australian Financial Review on 6 April 2011.

The spirit of competition has long been forgotten by the price war between Coles and Woolworths. Discounted milk, beer and perhaps chicken prices have shifted the competitive position between the supermarket chains to one of ‘misuse’ of market power and calls for government action to ‘bust the cartel’.

This kind of shift is a misrepresentation of competitive nature and isn’t acknowledging the value of competition in avoiding monopolistic pricing by buyers and/or sellers. Unequal power of either buyers or sellers can lead to an exploitation of prices, which is detrimental to consumers.

In a competitive business world, balance of market power between consumers and producers is preferred to that of government intervention. The theory of countervailing power, as proposed by economist J. K. Galbraith, assumes that competition and innovation can be achieved by the interactions of ‘opposing’ large economic institutions. By exercising their market power offsets each of these large players’ abilities to unduly influence prices of goods and services.

Countervailing power of economic institutions such as large retail chains, large manufacturers – or intermediate producers – and even agricultural co-operatives provides the basis for competition without the need for government intervention, beyond the existing competitive legal frameworks.

In fact, Galbraith, in his famous book American Capitalism, suggests that the emergence of large retail chains in the US were the consumer’s defence against the market power of large producers of consumer goods.

Large retail chains are an instrument for countering the power of ‘cartels’. In the current Australian context, these ‘cartels’ – or firms – might be considered to be the Fosters and the milk processors, such as Fonterra, whose margins have been targeted by Coles and Woolworths for their own purposes and also for the benefit of the consuming public.

In this case and others to follow, large retail chains are exercising their market power to offset that of larger sets of sellers or countervailing power in the spirit of competition and that of engendering efficiencies within the supply chain.

Where this debate has been derailed is not the impact on these large intermediary firms, such as Fosters and Fonterra, but on the less well organized farmers and perhaps more broadly the agricultural sector. It might also have something to do with Australian and especially governments ‘agrarian exuberance’.

In spite of this, in a ‘Galbriathian’ sense, weaker suppliers – milk farmers in this case – need to be better organized and develop mechanisms where they too can exert their countervailing power. They too could withhold their product from their intermediate processes and retailers in order to command better prices and follow the lead of the potato farmers and Fosters.

As a group, the agricultural sector needs to respond to these competitive pressures by improving their overall efficiency. Such responses are demanded by a vigorously competitive economy, where the exercise of market power in this case by Coles and Woolworths is not that of misuse market power, but that of countervailing power.
Dr Peter Lamb is a Lecturer in Business in the Regional School of Business at La Trobe University